Recently, Brookfield Renewable (TSX: BEP.UN)(TSX: BEPC) investors, along with Brookfield Corp (TSX: BN) shareholders, got an unexpected bit of great news:
Brookfield Renewable is signing an unprecedented deal to supply $3 billion worth of hydro power to Alphabet.
The deal, which will see Brookfield supply power to Google’s data centres over 20 years, is a landmark one for Canada’s biggest renewable energy company. First and foremost, it shows that despite Donald Trump’s ongoing tariff actions, which dim the goodwill between Canada and the U.S. somewhat, cross-border deal-making continues: it’s still business as usual. Second, Brookfield Renewable’s Google deal is the second one it has signed with a U.S. tech giant, increasing the perception that the company is the renewable power of choice to the Magnificent Seven.
In this article, I explore the details of Brookfield/Brookfield Renewable’s Google deal and what it means for shareholders.
Source: Getty Images
Nature of the deal
The deal Brookfield signed with Google is a “Hydro Framework Agreement,” meaning that it outlines a long-term agreement for one company to supply power to another. It was reported as being the world’s largest ever agreement for hydro power to a single end customer. It was not immediately clear from Brookfield’s announcement whether the agreement was legally binding or not.
Terms of the deal
The terms of Brookfield’s Google deal could broadly be described as “expansive.” They include the following:
- Brookfield to supply 3,000 megawatts (MW) of power from hydro plants to Google data centres over the duration of the cooperation.
- Initial projects supplying 670 MW of power from two Pennsylvania power plants: Holtwood and Safe Harbor.
- $3 billion estimated value of the first, 670 MW phase.
- 20 years of cooperation.
Although the full details of Brookfield and Google’s cooperation will likely be hammered out in the years ahead, the first phase of the deal (the one involving Holtwood and Safe Harbor plants) looks pretty fleshed out. So, probably Brookfield Renewable has locked down $3 billion worth of new revenue over the next few years. If pricing remains the same for later phases of the deal, then total revenue could go as high as $13.43 billion! That will accrue directly to Brookfield Renewable shareholders and unit holders, as well as indirectly to Brookfield Corp (the parent company) shareholders.
Is Brookfield Renewable a buy?
Brookfield Renewable’s Google deal was clearly a bullish catalyst for the stock. However, one such catalyst does not automatically make a stock a buy. In order for that to be the case, Brookfield needs to demonstrate solid growth and profitability, as well as a sensible valuation.
The company scores pretty well on growth, with revenue compounding at 10% and free cash flow at 24% over the last 10 years. It’s also highly profitable, with a 56% gross margin and a 34% free cash flow margin.
Finally, the stock is sensibly valued by some metrics, with a 2.7 price to sales ratio, a 2.13 price to book ratio, and an 11 price to cash flow ratio. These multiples aren’t “dirt cheap” by energy standards, but they are well within the realm of sanity. So, given the catalysts it has, Brookfield Renewable stock might just be a buy.
